Friday, August 19, 2011

The Need for Chutzpah

What we need is a new and bold jobs plan. This creed seems to be igniting much of the political writers currently. Bernstein likes to talk about his FAST proposal, while Khimm has harped on infrastructure banks and other put people to work programs. However, we have been in this current recession for upwards of 3 years. Since the "recovery" began in the 3rd quarter of 2009, our growth has averaged an abysmal 2.5%. Public opinion in regards to the economy is also wallowing in the doldrums. According to Gallup, only 19% of the public currently think the economy is getting better, while 76% think it is getting worse.

Now neither of these figures definitively prove how the economy will do from this point forward, but I think it points towards something often overlooked in government policy debates, the role of self-perpetuating cycles of pessimism. To add a bit of context, let's travel back to 1933. The economy had been experiencing Depression conditions for nearly 4 years. The number of banks in the country had been cut in half, prices had plunged by nearly a quarter, while investment had fallen off a cliff, reduced 77% by 1933. The economy was in a hole, with no way up. In March, a new, bold and silver-tongued President entered office. One of the first acts in office of FDR was a national banking holiday combined with getting the US off the gold standard by devaluing gold and suspending gold contracts. (Side Note: The US did not formerly set a new peg for gold until Jan. 1934, creating some uncertainty, See Federer and Zalewski) Peter Temin sees not only the policy, but what the policy said about the new regime as highly important. The devaluation of gold was a signal, not only of a singular policy change, but of an entirely different way of economically thinking, one that threw off the fetters of gold. This distinction between policy and regime change is what Temin finds most important:

"So, here is the distinction, which is that if you take an action contrary to a regime that it is seen as being contrary to the regime it will have minimum impact because it will be seen as an aberration and it won't be seen as a large thing. So while it may have some effect, the individual action will have very little effect. If on the other hand the regime changes, then the actions interpreted as changes in regime will seem to have larger effects. The difference...is not in the actions..but in the perceptions of the people who are undergoing these actions and responding to them." (Temin as quoted by Parker, 37)

While all of these individual policies the above authors highlight as good individual projects, I don't think they fully grasp the route forward. The US and the global economy is entering a period of incessant pessimism. It seems the opposite of the optimism bias is inflicting consumer and business decisions. Instead of looking for rays of hope shining out there, bad economic news tends to throw people into a dizzy. Loss-aversion has set in, and people who have been burned over the last three years, are heightened to any new signal of stormy clouds on the horizon. Just like someone who has been mugged is very touchy when walking down what others would perceive to be well-lit streets, consumers are afraid of any hints of economic turmoil in the future. In this air of pessimism, singular government projects such as a payroll holiday, unemployment benefits, FAST! etc. will help to keep the unemployment rate down, but they will not get the mood in the country going again. When people say something bold needs to be done, they need to mean it. There is a reason that the Bush administration reshuffled much of its cabinet between its first and second term, with Condolezza Rice meeting with many allies early on to try and a signal new diplomacy. They too wanted to try and show that they were charting a new course.

Though, the Bush administration inevitably committed actions contrary to its new, and more multilateral image, it speaks to the necessity of both real and symbolic action in the face of negative expectations. I'm saying a stimulus with a real price tag that will shock. We should be thinking multiple trillions here. The American Society for Civil Engineers has already projected it will cost between $130-$240 billion, per year, for the next 15 years to update our infrastructure. This area, plus aids to the states, education revamps, an infrastructure bank should ALL be parts of a package. The key is this package must be BIG! Small packages will only mitigate job losses without providing an impetus for changing expectations. Furthermore, this action should be in concert with more symbolic actions. A new jobs commission, recess appointments to key positions on the Fed, and plausibly a new Treasury Secretary would help. Additionally, the bully pulpit needs to be used. Obama must start harping on the need for more spending now, trying to throw off the shackles of austerity rhetoric. What we are looking for is some chutzpah, will the administration and leaders of congress respond?